sec proposed rule on pay ratio disclosure
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229 and 249
Release Nos. 33-9452; 34-70443; File No. S7-07-13
RIN 3235-AL47
PAY RATIO DISCLOSURE
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
SUMMARY: We are proposing amendments to Item 402 of Regulation S-K to implement
Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section
953(b) directs the Commission to amend Item 402 of Regulation S-K to require disclosure of the
median of the annual total compensation of all employees of an issuer (excluding the chief
executive officer), the annual total compensation of that issuer’s chief executive officer and the
ratio of the median of the annual total compensation of all employees to the annual total
compensation of the chief executive officer. The proposed disclosure would be required in any
annual report, proxy or information statement or registration statement that requires executive
compensation disclosure pursuant to Item 402 of Regulation S-K. The proposed disclosure
requirements would not apply to emerging growth companies, smaller reporting companies or
foreign private issuers.
DATES: Comments should be received on or before December 2, 2013.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments:
Use the Commission’s Internet comment form (http://www.sec.gov/rules/proposed.shtml);
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Send an e-mail to rule-comments@sec.gov. Please include File Number S7-07-13 on the
subject line; or
Use the Federal Rulemaking ePortal (http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments:
Send paper comments to Elizabeth M. Murphy, Secretary, Securities and Exchange
Commission, 100 F Street, NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-07-13. This file number should be included on
the subject line if e-mail is used. To help us process and review your comments more efficiently,
please use only one method. The Commission will post all comments on the Commission’s
Internet website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for
website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE,
Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change; we do not edit personal identifying
information from submissions. You should submit only information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT: Christina L. Padden, Attorney Fellow in the
Office of Rulemaking, at (202) 551-3430, in the Division of Corporation Finance; 100 F Street,
NE, Washington, DC 20549.
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SUPPLEMENTARY INFORMATION: We are proposing amendments to Item 4021 of
Regulation S-K 2 and a conforming amendment to Form 8-K 3 under the Securities Exchange Act
of 1934 (the “Exchange Act”).4
1 17 CFR 229.303.
2 17 CFR 229.10 et seq.
3 17 CFR 249.220f.
4 15 U.S.C. 78a et seq.
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TABLE OF CONTENTS
I.
Background
A.
Section 953(b) of the Dodd-Frank Act
B.
Comments Received
II.
Discussion of the Proposed Amendments
A.
Introduction
B.
Scope of Section 953(b) of the Dodd-Frank Act
1.
Filings Subject to the Proposed Disclosure Requirements
2.
Registrants Subject to the Proposed Disclosure Requirements
C.
Proposed Requirements for Pay Ratio Disclosure
1.
New Paragraph (u) of Item 402 (Pay Ratio Disclosure)
2.
Employees Included in the Identification of the Median
3.
Identifying the Median
4.
Determination of Total Compensation
5.
Disclosure of Methodology, Assumptions and Estimates
6.
Clarification of the Meaning of “Annual”
7.
Timing of Disclosure
8.
Status as “Filed” not “Furnished”
D.
Transition Matters
1.
Proposed Compliance Date
2.
Proposed Transition for New Registrants
III.
General Request for Comment
IV.
Economic Analysis
V.
Paperwork Reduction Act
VI.
Small Business Regulatory Enforcement Fairness Act
VII.
Regulatory Flexibility Act Certification
VIII.
Statutory Authority and Text of Amendments
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I. BACKGROUND
A. Section 953(b) of the Dodd-Frank Act
Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”)5 directs the Commission to amend section 229.402 of title 17, Code of
Federal Regulations, to require each issuer, other than an emerging growth company, as that term
is defined in Section 3(a) of the Securities Exchange Act of 1934, to disclose in any filing of the
issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor
thereto) — the median of the annual total compensation of all employees of the issuer, except the
chief executive officer (or any equivalent position) of the issuer; the annual total compensation of
the chief executive officer (or any equivalent position) of the issuer; and the ratio of the median of
the total compensation of all employees of the issuer to the annual total compensation of the chief
executive officer of the issuer. Section 953(b) also requires that the total compensation of an
employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17,
Code of Federal Regulations, as in effect on the day before the date of enactment of the Dodd-
Frank Act.6
We are proposing amendments to implement Section 953(b). We refer to this disclosure
of the median of the annual total compensation of all employees of the issuer, the annual total
compensation of the chief executive officer of the issuer and the ratio of the two amounts as “pay
ratio” disclosure.
5 Public Law No. 111-203, 124 Stat. 1376 (2010), as amended by Public Law No. 112-106,126 Stat. 306
(2012).
6 Public Law No. 111-203, sec. 953(b), 124 Stat. 1376, 1904 (2010), as amended by Public Law No. 112-106,
sec. 102(a)(3), 126 Stat. 306, 309 (2012). Section 102(a)(3) of the Jumpstart Our Business Startups Act (the“JOBS Act”) amended Section 953(b) of the Dodd-Frank Act to provide an exemption for registrants thatare emerging growth companies as that term is defined in Section 3(a) of the Exchange Act.
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Section 953(b) of the Dodd-Frank Act does not amend the Securities Act of 1933
(“Securities Act”)7 or the Exchange Act. Instead, Section 953(b) directs the Commission to
amend Item 402 of Regulation S-K (“Item 402”) to add the pay ratio disclosure requirements
mandated by the Dodd-Frank Act. Although Section 953(b) defines some terms used in the
provision, commenters have raised questions about the scope of the statutory requirements and
the need for additional interpretive guidance.8
B. Comments Received
In connection with rulemakings implementing the Dodd-Frank Act, we have sought
comment from the public before the issuance of a proposing release. With respect to Section
953(b) of the Dodd-Frank Act, as of September 15, 2013, we have received approximately 22,860
comment letters and a petition with approximately 84,700 signatories.9 We have considered these
comments in proposing the rules described in this release.
Commenters were divided in their recommended approaches to Section 953(b) and the
implementation issues it raises. Comments from industry groups, issuers, law firms and executive
compensation professionals generally raised concerns about the complexity of the Section 953(b)
requirements, the significant compliance costs that could be involved and the potential inability
7 15 U.S.C. 77a et seq.
8 Comments submitted to the Commission in connection with Section 953(b) are discussed generally in
Section I.B. and throughout this release as they relate to specific aspects of the proposals.
9 Comments related to the executive compensation provisions of the Dodd-Frank Act, including Section953(b), are available at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml. In connection with Section 953(b), the Commission received approximately 260unique comment letters and approximately 22,600 form letters (posted on the website as Letter Type A) asof September 15, 2013. The Commission also received a petition (posted on the website as Letter Type B)with approximately 84,700 signatories. In this release, references to comment letters identify the commenter by the name of the organization or individual submitting the letter. Letters by commenters who submittedmultiple letters are identified by date.
http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtmlhttp://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtmlhttp://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtmlhttp://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml
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for many companies to verify the accuracy of their disclosure.10 These commenters generally
asserted that this type of disclosure would not be material to investors or useful to an investment
or voting decision, and they disputed the potential benefits cited by commenters who supported
the provision.11 Comments from individual and institutional investors and some public policy
organizations generally outlined what they expected to be the benefits of the mandated
information and urged the Commission to implement the provision in a way that would preserve
those benefits.12 Notwithstanding these differing viewpoints, several commenters supported a
flexible approach to implementation that would retain the potential benefits of the mandated
disclosure, while avoiding the additional compliance costs that a less flexible approach could
impose.13
We discuss the concerns and recommendations from the commenters in more detail
throughout this release. We agree with commenters that, depending on how Section 953(b) is
implemented, the cost of compliance with these new disclosure requirements could be, at least for
some registrants, substantial. The rules we are proposing are intended to address commenters’
10 See, e.g., letters from American Bar Association (“ABA”); Center on Executive Compensation dated
September 10, 2010 (“COEC I”); Center on Executive Compensation dated November 11, 2011 (“COECII”); Davis Polk & Wardwell LLP (“Davis Polk”); Business Roundtable et al., (“Group of TradeAssociations”); Society of Corporate Secretaries and Governance Professionals (“SCSGP”); Greta E.Cowart, Haynes & Boone LLP et al. (“Group of Exec. Comp. Lawyers”); Protective Life Corporation;Towers Watson; Brian Foley & Co.; and Pay Governance LLC. We discuss these costs in detail in SectionIV of this release.
11 See, e.g., COEC I and letters from Brian Foley & Co.; Group of Trade Associations; Meridian
Compensation Partners, LLC; National Association of Corporate Directors (“NACD”); and Retail IndustryLeaders Association (“RILA”).
12 See, e.g., letters from AFL-CIO dated December 13, 2010 (“AFL-CIO I”) and AFL-CIO dated August 11,
2011 (“AFL-CIO II”); Americans for Financial Reform; Batirente et al. (“Group of International Investors”);J. Brown; K. Burgoyne; Calvert Investment Management; Community Action Commission; CtW InvestmentGroup; Drucker Institute; Institute for Policy Studies; R. Landgraf; D. Miron; Social Investment Forum; S.Towns; Trillium Asset Management; UAW Retiree Medical Benefits Trust; and Walden Asset Management.See also Letter Type A. We discuss these benefits in detail in Section IV of this release.
13 See, e.g., AFL-CIO II and letters from ABA; American Benefits Council; COEC II; Protective Life
Corporation; and Davis Polk.
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concerns and are designed to lower the cost of compliance while remaining consistent with
Section 953(b).
II. DISCUSSION OF THE PROPOSED AMENDMENTS
A.
Introduction
Section 953(b) imposes a new requirement on registrants to disclose the median of the
annual total compensation of all employees (excluding the chief executive officer), the annual
total compensation of the chief executive officer and the ratio of the median disclosed to the
annual total compensation of the chief executive officer. Section 953(b)(2) specifies that, for
purposes of Section 953(b), the total compensation of an employee of an issuer shall be
determined in accordance with Item 402(c)(2)(x) of Regulation S-K. The Commission’s rules for
compensation disclosure have traditionally focused on the compensation of executive officers and
directors.14 Although registrants subject to Item 402 are required to provide extensive
information about the compensation of the principal executive officer (“PEO”) and other named
executive officers identified pursuant to Item 402(a), current disclosure rules generally do not
require registrants to disclose detailed compensation information for other employees in their
14 Initially, disclosure requirements for executive and director compensation were set forth in Schedule A to
the Securities Act and Section 12(b) of the Exchange Act, which list the type of information to be includedin Securities Act and Exchange Act registration statements. In 1938, the Commission promulgated its firstexecutive and director compensation disclosure rules for proxy statements. See Amended Proxy Rules,Release No. 34-1823 (Aug. 11, 1938) [3 FR 1991].
From time to time thereafter, the Commission has amended its executive and director compensationdisclosure requirements in light of changing trends in executive compensation and other issues, and, morerecently, to comply with the mandates of the Dodd Frank Act. See, e.g., Solicitation of Proxies Under theAct, Release No. 34-3347 (Dec. 18, 1942) [7 FR 10655]; Solicitation of Proxies, Release No. 34-4775 (Dec.11, 1952) [17 FR 11431]; Uniform and Integrated Reporting Requirements: Management Remuneration,
Release No. 33-6003 (Dec. 4, 1978) [43 FR 58181]; Disclosure of Executive Compensation, Release No.33-6486 (Sept. 23, 1983) [48 FR 44467]; Executive Compensation Disclosure, Release No. 33-6962 (Oct.16, 1992) [57 FR 48126]; Executive Compensation Disclosure; Securityholder Lists and Mailing Requests,Release No. 33-7032 (Nov. 22, 1993) [58 FR 63010]; Executive Compensation and Related PersonDisclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158] (“2006 Adopting Release”); ProxyDisclosure Enhancements, Release No. 33-9089A (Dec. 16, 2009) [74 FR 68334]; and ShareholderApproval of Executive Compensation and Golden Parachute Compensation, Release No. 33-9178 (Jan. 25,2011)[76 FR 6010].
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filings with the Commission.15 Commenters have observed that, because of the complexity of the
requirements of Item 402(c)(2)(x), registrants typically compile information required by Item
402(c) manually for the named executive officers, which they have stated takes significant time
and resources.16 We do not expect that many registrants, if any, currently disclose or track total
compensation as determined pursuant to Item 402 for their workforce.17 Registrants are required
to present various elements of employee compensation, on an aggregate basis, in the relevant line
items of their financial statements and related footnotes (such as accrued payroll and benefits
amounts recorded in current liabilities on the balance sheet, or salary and bonus amounts included
in selling and administrative expenses or cost of goods sold on the income statement).
18
These
amounts are calculated and presented in accordance with the comprehensive set of accounting
principles that the registrant uses to prepare its primary financial statements. For example, under
United States generally accepted accounting principles (“U.S. GAAP”), there are several
15 Although the group of covered individuals for whom disclosure is required has changed over time, the rules
generally have sought to require compensation disclosure for “persons who, in fact, function as key, policy-making members of management.” Uniform and Integrated Reporting Requirements: ManagementRemuneration, Release No. 33-5950 (July 28, 1978) [43 FR 34415], at 34416.
16 See letter from Davis Polk. See also letter from R. Morrison.
17 See letter from Protective Life (noting that “very few employers routinely determine certain items of
compensation for individual ‘rank and file’ employees, notably the values of stock and stock option awardsand the aggregate change in the actuarial present value of defined benefit pension plan accruals. For mostemployers, determining these amounts will require, for the first time, calculations for all (or a large subset)of their employees”). See also COEC I (“No public company currently calculates each employee’s totalcompensation as it calculates total pay on the Summary Compensation Table for the named executiveofficers, because disclosure of executive pay has a different purpose than internal accounting.”); and letterfrom R. Morrison (“Collecting, organizing, and analyzing this kind of data for all employees in order todevelop a median comp figure would be extremely complex, time-consuming, and burdensome, assumingthis is even possible.”).
18 “Total compensation” as determined pursuant to Item 402 is not an amount that is reported or calculated in
connection with a registrant’s financial statements.
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accounting standards that relate to compensation,19 and these standards are distinct from the
Commission’s executive compensation disclosure rules. In addition, the Commission’s executive
compensation disclosure rules differ from tax accounting and reporting standards.20 Therefore,
Section 953(b) requires registrants to disclose specific information about non-executive employee
compensation that is not currently required for disclosure, accounting or tax purposes.
Many commenters raised concerns about the significant compliance costs that could result
from requiring the use of “total compensation” as defined in Item 402(c)(2)(x) to calculate
employee pay and requiring registrants to identify the median instead of the average.21 According
to these commenters, the primary driver of the significant compliance costs is that many
registrants, whether large multinationals or companies of modest revenue size and market
19 See, e.g., FASB ASC 710, Compensation — General; ASC 715, Retirement Benefits Compensation; ASC
960, Defined Benefit Pension Plans; ASC 962, Defined Contribution Pension Plans; ASC 965, Health andWelfare Benefit Plans; and ASC 718, Compensation— Stock Compensation.
20 For example, registrants that are subject to the United States Internal Revenue Code [26 U.S.C. 1 et seq.] are
required to report certain compensation information for each employee to the Internal Revenue Service,typically on Form W-2. The elements of compensation that are required to be calculated and reported onForm W-2 are not the same as those covered by Item 402 requirements, and the reported amounts relate tothe relevant calendar year for tax purposes, rather than the registrant’s fiscal year.
Additionally, the compensation required to be disclosed under Item 402 reflects the compensation that wasawarded to, earned by or paid to the executive officer during the fiscal year in contrast to compensationreported on Form W-2, which reflects only compensation that was includible in income for income tax purposes during the calendar year regardless of when that compensation was earned. For example, underItem 402, the value of stock options, deferred salary and bonuses would be included in compensation in the period they were awarded or earned. In contrast, for purposes of Form W-2, income from stock options isgenerally included in income at the time of exercise, and income relating to deferred salary and bonuses isincluded only when those amounts are actually paid, which could be in a future year.
21 See, e.g., letters from Davis Polk (noting that compliance will be “highly costly and burdensome, with
tremendous uncertainty as to accuracy. Companies are justifiably concerned about the costs and burdens toaccomplish the formidable data collection and calculation tasks for employees worldwide between the endof the year and the first required filing.”); Frederick W. Cook & Co., Inc. (stating, “the calculation of median
total pay for all employees other than the CEO is problematic, burdensome and perhaps impossible for manyissuers”) and Protective Life Corporation (“It is difficult to overemphasize how burdensome thisrequirement could be for large employers. Calculating annual total compensation is much more complicatedthan simply adding up numbers that companies already have available….Since many large companies useoutside accounting, actuarial and compensation and pension administration firms to perform thesecalculations, the costs of disclosure will increase accordingly.”). See also letters from ABA; COEC I; Groupof Exec. Comp. Lawyers; Group of Trade Associations; Meridian Compensation Partners, LLC; NACD; andR. Morrison.
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capitalization, maintain multiple and complex payroll, benefits and pension systems (including
systems maintained by third party administrators) that are not structured to easily accumulate and
analyze all the types of data that would be required to calculate the annual total compensation for
all employees in accordance with Item 402(c)(2)(x). Thus, in order to compile such disclosure,
registrants would either need to integrate these data systems or consolidate the data manually,
which, in both cases, would be, according to these commenters, highly costly and time
consuming.22
The proposed rules to implement Section 953(b) are designed to comply with the statutory
mandate and to address commenters’ concerns regarding the potential costs of complying with the
disclosure requirement. Where we have exercised discretion in implementing the statutory
requirements, we are proposing alternatives that we believe will reduce costs and burdens, while
preserving what we believe to be the potential benefits, as articulated by commenters, of the
disclosure requirement mandated by the Dodd-Frank Act. We note, however, that neither the
statute nor the related legislative history directly states the objectives or intended benefits of the
provision.23 Commenters supporting Section 953(b) have emphasized that potential benefits
22 See, e.g., letter from Group of Trade Associations (“There is a widespread misconception that this
information is readily available at the touch of a button.”) See also COEC II and letters from Group ofExec. Comp. Lawyers; Meridian Compensation Partners, LLC; and R. Morrison.
23 The requirements imposed by Section 953(b) originated in the Senate. A provision identical to Section
953(b) was first included in S. 3049, the “Corporate Executive Accountability Act of 2010,” which wassponsored by Senator Menendez and introduced on February 26, 2010. In that bill, the provisionaccompanied a say-on-pay provision. A provision identical to Section 953(b) next appeared in S. 3217, the
“Restoring American Financial Stability Act of 2010” sponsored by Senator Dodd and introduced on April15, 2010, which served as the basis for the Senate’s amendments to H.R. 4173. The legislative recordincludes only a few brief references to the pay ratio disclosure requirements, each opposing the provision.See 156 Con. Rec. S3121 (daily ed. May 5, 2010) (statement of Sen. Gregg) and 156 Cong. Rec. S4075(daily ed. May 20, 2010) (statement of Sen. Shelby). The April 30, 2010 report issued by the SenateCommittee on Banking, Housing and Urban Affairs does not mention the pay ratio requirements other than ashort statement by the minority. See Report of the Senate Committee on Banking, Housing and UrbanAffairs to Accompany S. 3217 (“the Senate Report”), S. Rep. No. 111-176, at 245.
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could arise from adding pay ratio-type information to the total mix of executive compensation
information.24 We have considered the statutory mandate of Section 953(b) in the context of
other executive compensation disclosure under Item 402, and, where practicable, we have sought
to make the mandated disclosure of Section 953(b) work with the existing executive
compensation disclosure regime.
In light of the significant potential costs articulated by commenters,25 we believe that it is
appropriate for the proposed rules to allow registrants flexibility in developing the disclosure
required by the statute. The proposal seeks to implement Section 953(b) without imposing
additional prescriptive requirements that are not mandated by the Dodd-Frank Act and reflects our
consideration of the relative costs and benefits of this approach as opposed to a more prescriptive
one. For example, registrants would be able to choose from several options in order to provide
the disclosure. Registrants may choose to identify the median using their full employee
population or by using statistical sampling or another reasonable method. In doing so, the
proposed requirements would allow registrants to choose a statistical method to identify the
The requirements of Section 953(b) were not discussed during the conference committee’s deliberations onthe legislation. Similarly, the Joint Explanatory Statement of the Committee of Conference does notmention the pay ratio requirements in its summary of Title IX, Subtitle E. See Conference Report on H.R.4173, H. Rep. No. 111-517, at 872.
24 See, e.g., letters from Americans for Financial Reform (“Existing requirements mandate disclosure of top
executive compensation only, encouraging companies to focus unduly on peer to peer comparisons whensetting CEO pay….Disclosure of CEO-to-worker pay ratios will encourage Boards of Directors to alsoconsider vertical pay equity within firms.”); Calvert Investment Management (“The disclosure required bySection 953(b) will help investors understand how issuers are distributing compensation dollars throughoutthe firm in ways that may help improve employee morale and productivity.”); CtW Investment Group (“Thenew disclosure offers an insight into compensation within the entire organization, and provides a differentway for boards and shareholders to evaluate the relative worth of a CEO.”); and UAW Retiree MedicalBenefits Trust (“[W]e view Section 953(b) as an essential tool that will increase corporate boardaccountability to investors…a comparison between CEO and employee pay may help shareholders identifythe board’s strengths and weaknesses, and may provide insight into [the board’s] relationship with theCEO.”).
25 The potential costs arising from the requirements of Section 953(b), as well as the potential costs relating to
the proposed rules, are discussed in detail below in Section IV of this release.
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median that is appropriate to the size and structure of their own businesses and the way in which
they compensate employees, rather than prescribing a particular methodology or specific
computation parameters. Registrants may calculate the annual total compensation for each
employee included in the calculation (whether the entire population or a statistical sample) and
the PEO using Item 402(c)(2)(x) and to identify the median using this method. As an alternative,
registrants may identify the median employee based on any consistently applied compensation
measure and then calculate the annual total compensation for that median employee in accordance
with Item 402(c)(2)(x). The proposed requirements also would permit registrants to use
reasonable estimates in calculating the annual total compensation for employees other than the
PEO, including when disclosing the annual total compensation of the median employee identified
using a consistently applied compensation measure. We believe that this flexible approach is
consistent with Section 953(b) and could ease commenters’ concerns about the potential burdens
of complying with the disclosure requirement. We do not believe that a one-size-fits-all approach
would be prudent, given the wide range of registrants and the disparate burdens on registrants
based on factors such as their type of business and the complexity of their payroll systems. We
seek comment on whether the proposed rules address sufficiently the practical difficulties of data
collection and whether there are other alternative approaches consistent with Section 953(b) that
could provide the potential benefits of pay ratio information at a lower cost. We also seek
comment on whether the flexible approach proposed in this release appropriately implements
Section 953(b).
The details of the proposal are set forth in the sections below. First, we interpret the scope
of Section 953(b) with respect to the filings and the registrants that are subject to the proposed
requirements. Next, we set forth the proposed new pay ratio disclosure requirement in Item 402,
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to be designated paragraph (u), and provide details on a variety of technical and interpretive
issues, including:
the employees that are to be included in the identification of the median;
identifying the median;
determining “total compensation;”
disclosure of the methodology, assumptions and estimates used;
the meaning of “annual” in the context of “annual total compensation;”
various timing matters that arise in connection with the proposed
requirements; and
the status of the disclosure as “filed” rather than “furnished.”
Finally, we address transition matters, including the proposed compliance date for registrants that
would be subject to the rules, and proposed transition provisions for new registrants.
B. Scope of Section 953(b) of the Dodd-Frank Act
1. Filings Subject to the Proposed Disclosure Requirements
In accordance with Section 953(b) of the Dodd-Frank Act, we are proposing to require
registrants to include pay ratio disclosure in any filing described in Item 10(a) of Regulation S-K
that requires executive compensation disclosure under Item 402 of Regulation S-K. Therefore,
the proposed pay ratio disclosure would be required in annual reports on Form 10-K,26
registration statements under the Securities Act and Exchange Act, and proxy and information
statements, to the same extent that the requirements of these forms require compliance with Item
26 17 CFR 249.310.
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402.27 We are not proposing changes to the requirements of these forms relating to Item 402.
Section 953(b) does not direct the Commission to amend any of its forms to add the pay ratio
disclosure requirements to filings that do not already require disclosure of Item 402 information,
and we are not proposing to do so.
Although some commenters suggested that Section 953(b)(1) requires pay ratio disclosure
in every Commission filing,28 other commenters suggested that the statute, by referring to filings
described in Item 10(a) of Regulation S-K, is intended to apply only to those filings for which the
applicable form requires Item 402 disclosure.29 We agree with the latter reading of Section
953(b). We believe that reading Section 953(b) to require pay ratio disclosure in filings that do
not contain other executive compensation information would not present this information in a
meaningful context. Because some commenters have asserted that the pay ratio disclosure would
provide another metric to evaluate executive compensation disclosure,30 we believe that the
proposed pay ratio disclosure should be placed in context with other executive compensation
disclosure, such as the summary compensation table required by Item 402(c) and the
27 Registrants would follow the instructions in each form to determine whether Item 402 information is
required, including any instructions that allow for the omission of Item 402 information in certaincircumstances, such as General Instructions I(2)(c) and J(1)(m) to Form 10-K containing special provisionsfor the omission of Item 402 information by wholly-owned subsidiaries and asset-backed issuers.
As described below in Section II.C.7., the proposed requirements do not require a registrant to update its payratio disclosure for the most recently completed fiscal year until it files its annual report on Form 10-K, or, iflater, its proxy or information statement for its next annual meeting of shareholders (or written consents inlieu of such a meeting).
In addition, we are proposing a transition period for compliance by new registrants that are subject toSection 953(b), so that the pay ratio requirement is not required in a registration statement on Form S-1 [17CFR 239.11] or Form S-11 [17 CFR 239.18] for an initial public offering or registration statement on Form
10 [17 CFR 249.210]. See Section II.D.2. of this release.28
See, e.g., COEC I and letters from American Benefits Council; Compensia, Inc.; Davis Polk; SCSGP; and
Towers Watson.
29 See, e.g., letters from ABA and RILA.
30 See, e.g., AFL-CIO I, House Letter and Senate Letter; and letters from CtW Investment Group and UAW
Retiree Medical Benefits Trust.
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compensation discussion and analysis required by Item 402(b), rather than provided on a stand-
alone basis. Therefore, we believe it is appropriate to read Section 953(b) as requiring pay ratio
disclosure in only those filings that are required to include other Item 402 information.
Request for Comment
1. Should we require the pay ratio disclosure only in filings in which Item 402 disclosure is
required, as proposed? Should we require the pay ratio disclosure in Commission forms
that do not currently require Item 402 disclosure? If so, which forms, and why? Would
disclosure be meaningful to investors where no other executive compensation disclosures
are required?
2. Do registrants need any additional guidance about which filings would require the
proposed pay ratio disclosure? Are there circumstances where the requirements of a
particular form call for Item 402 information in certain circumstances, but the applicability
of the proposed pay ratio disclosure requirements may not be clear? If so, please provide
details about what should be clarified and what guidance is recommended.
2.
Registrants Subject to the Proposed Disclosure Requirements
The proposed pay ratio disclosure requirements would apply to only those registrants that
are required to provide summary compensation table disclosure pursuant to Item 402(c). We
recognize that the reference to “each issuer” in Section 953(b) could be read to apply to all issuers
that are not emerging growth companies, including smaller reporting companies and foreign
private issuers. As a result of the specific reference in Section 953(b) to the definition of total
compensation contained in Item 402(c)(2)(x), and the absence of direction to apply this
requirement to companies not previously subject to Item 402(c) requirements, we propose to limit
the pay ratio disclosure requirement to registrants that are subject to Item 402(c) requirements, as
described in more detail below.
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a. Emerging Growth Companies Are Not Covered
Under JOBS Act Section 102(a)(3), registrants that qualify as emerging growth
companies, as that term is defined in Section 3(a) of the Exchange Act, 31 are not subject to
Section 953(b). To give effect to the statutory exemption, we are proposing an instruction to Item
402(u) that provides that a registrant that is an emerging growth company is not required to
comply with Item 402(u).32
b. Smaller Reporting Companies Are Not Covered
Section 953(b) requires total compensation to be calculated in accordance with Item
402(c)(2)(x). Smaller reporting companies (as defined in Item 10(f)(1) of Regulation S-K)33 are
permitted to follow the scaled disclosure requirements set forth in Items 402(m)-(r) instead of
complying with the disclosure requirements set forth in Items 402(a)-(k) and (s),34 and therefore
are not required to calculate compensation in accordance with Item 402(c)(2)(x). The
requirement set forth in Item 402(n) for disclosure of summary compensation table information,
which includes disclosure of “total compensation,” does not require smaller reporting companies
to include all of the same types of compensation required to be included in total compensation for
other registrants under Item 402(c)(2).35 We believe that by requiring the use of Item 402(c)(2)(x)
31 15 U.S.C. 78c(a).
32 See proposed Instruction 6 to Item 402(u).
33 17 CFR 229.10(f)(1).
34 See Item 402(l). Smaller reporting companies are permitted to choose compliance with either the scaled
disclosure requirements or the larger company disclosure requirements on an “a la carte” basis. Asdiscussed in the scaled disclosure adopting release, the staff evaluates compliance by smaller reportingcompanies with only the Regulation S-K requirements applicable to smaller reporting companies, even if thecompany chooses to comply with the larger company requirements. See Smaller Reporting CompanyRegulatory Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934], at 941.
35 Specifically, under Item 402(n)(2)(viii), smaller reporting companies are not required to include the
aggregate change in the actuarial present value of pension benefits that is required for companies subject toItem 402(c)(2)(viii).
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to calculate total compensation (without mention of Item 402(n)(2)(x)), Congress intended to
exclude smaller reporting companies from the scope of Section 953(b). In addition, requiring
smaller reporting companies to provide the pay ratio disclosure consistent with the requirement
for other registrants would require smaller reporting companies to collect data and calculate
compensation for the PEO in a manner they otherwise would not be required to calculate
compensation. Thus, we do not believe this is the intent of the provision.
Therefore, as proposed, the pay ratio disclosure requirements would not apply to smaller
reporting companies. To make this clear, we are proposing a technical amendment to paragraph
(l) of Item 402, to add proposed paragraph (u) to the list of items that are not required for smaller
reporting companies.
c. Foreign Private Issuers and MJDS Filers Are Not Covered
Foreign private issuers that file annual reports and registration statements on Form 20-F
and MJDS filers that file annual reports and registration statements on Form 40-F would not be
required to provide the proposed pay ratio disclosure, because those forms do not require Item
402 disclosure.36 We do not read Section 953(b) as requiring the Commission to expand the
scope of Item 402 to apply to companies that are not currently subject to the executive
compensation disclosure requirements set forth in Item 402. Accordingly, we are not proposing
to amend Form 20-F or Form 40-F, and the proposed pay ratio disclosure requirements would not
be applicable to foreign private issuers or MJDS filers. In addition, we are not proposing any
36 The term “MJDS filers” refers to registrants that file reports and registration statements with theCommission in accordance with the requirements of the U.S.- Canadian Multijurisdictional DisclosureSystem (the “MJDS”). The definition for “foreign private issuer” is contained in Exchange Act Rule 3b-4(c)[17 CFR 240.3b-4(c)]. A foreign private issuer is any foreign issuer other than a foreign government, exceptfor an issuer that, as of the last business day of its most recent fiscal year, has more than 50% of itsoutstanding voting securities held of record by United States residents and any of the following: a majorityof its officers and directors are citizens or residents of the United States, more than 50% of its assets arelocated in the United States, or its business is principally administered in the United States.
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changes to existing Item 402(a)(1), which provides for the treatment of foreign private issuers.
Accordingly, foreign private issuers that file annual reports on Form 10-K will continue to be able
to satisfy Item 402 requirements by following the requirements of Items 6.B and 6.E.2 of Form
20-F and would not be required to make the pay ratio disclosure mandated by Section 953(b). In
addition, requiring foreign private issuers and MJDS filers to provide the pay ratio disclosure
consistent with the requirement for other registrants would require these registrants to collect data
and calculate compensation for the PEO in a manner they otherwise would not be required to
calculate compensation. Thus, we do not believe this is the intent of the provision.
Request for Comment
3. Should the pay ratio disclosure requirements, as proposed, apply only to those registrants
that are required to provide summary compensation table disclosure pursuant to Item
402(c)? If not, to which registrants should pay ratio disclosure requirements apply?
4. Should we revise the proposal so that smaller reporting companies would be subject to the
proposed pay ratio disclosure requirements? If so, why? If so, also discuss how smaller
reporting companies should calculate total compensation for employees and the PEO. For
example, should they be required to calculate total compensation in accordance with Item
402(c)(2)(x) instead of the scaled disclosure requirements? In the alternative, should
smaller reporting companies be required to provide a modified version of the pay ratio
disclosure? If so, why, and what should that modified version entail? Should it be based
on the compensation amounts required under the scaled disclosure requirements
applicable to smaller reporting companies, such as a ratio where the PEO compensation
and other employee compensation are calculated in accordance with Item 402(n)(2)(x)?
Please provide information as to particular concerns that smaller reporting companies may
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have. Please discuss whether the disclosure would be useful to investors in smaller
reporting companies.
5. Should we amend either Form 20-F or Form 40-F to include disclosure that is similar to
the proposed pay ratio disclosure requirements? If so, why? Assuming we would not
otherwise subject foreign private issuers to the executive compensation disclosure rules,
what modifications would be needed to address the different reporting requirements that
foreign private issuers and MJDS filers have for executive compensation disclosure in
order to require pay ratio disclosure? In particular, how should these registrants calculate
total compensation (for the PEO and for employees) for purposes of such a requirement?
Please provide information as to particular concerns that foreign private issuers or MJDS
filers may have if they were required to comply with such a requirement. Please discuss
whether the disclosure would be useful to investors, particularly in the absence of the
executive compensation disclosure that would accompany disclosure of the ratio for
registrants subject to Item 402 disclosure.
C.
Proposed Requirements for Pay Ratio Disclosure
1. New Paragraph (u) of Item 402 (Pay Ratio Disclosure)
We are proposing new paragraph (u) of Item 402 that would require disclosure of:
(A) the median of the annual total compensation of all employees of the registrant,
except the principal executive officer of the registrant;
(B) the annual total compensation of the principal executive officer of the registrant;
and
(C) the ratio of the amount in (A) to the amount in (B), presented as a ratio in which
the amount in (A) equals one or, alternatively, expressed narratively in terms of the
multiple that the amount in (B) bears to the amount in (A).
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For consistency with existing Item 402 requirements, the proposed requirements would
use the defined term “PEO” (principal executive officer), instead of the term “chief executive
officer” used in Section 953(b).37 PEO is defined in Item 402(a)(3) as an “individual serving as
the registrant’s principal executive officer or acting in a similar capacity during the last completed
fiscal year.” We believe that this consistency would simplify compliance for registrants and
would clarify how the pay ratio disclosure relates to the PEO’s total compensation figure
disclosed in the summary compensation table. We also believe that this change in terminology is
consistent with Section 953(b).
Section 953(b) specifies that registrants must disclose the ratio of the median of the
annual total compensation of all employees to the PEO’s annual total compensation. We note that
three commenters raised concerns about the presentation of the pay ratio in the order set forth in
Section 953(b).38 These commenters noted that the customary manner of presenting similar types
of ratios would include the PEO’s annual total compensation in the numerator and the median of
the annual total compensation of all employees in the denominator and would typically be
expressed in terms of the multiple that the PEO amount bears to the median amount (such as
“PEO pay is X times the median employee pay”). These commenters recommended that we
allow registrants to present the ratio in this more customary manner.
37 The term chief executive officer in the executive compensation rules was replaced by the term “principal
executive officer” as part of the 2006 amendments to Item 402 of Regulation S-K in order to maintainconsistency with the nomenclature used in Item 5.02 of Form 8-K. See 2006 Adopting Release, supra note14, at n. 326.
38 See letters from Compensia, Inc. (“For example, if the annual total compensation of a company’s chief
executive officer was $3,750,000 and the median of the annual total compensation of all employees was$75,000, then as currently formulated, the required disclosure would be 0.02 to 1, rather than the commonlyunderstood calculation of 50 to 1.”); Frederick W. Cook & Co., Inc.; and Group of Exec. Comp. Lawyers(“For example, if CEO pay were 2 million and the median annual compensation of all employees were$25,000, the statute literally requires a disclosure that the median annual compensation of all employees is1/80 of the CEO’s pay.”).
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Although Section 953(b) calls for a ratio showing the median of the annual total
compensation of all employees to the PEO’s annual total compensation, it does not specify how
the ratio should be expressed. In order to promote consistent presentation and address the
potential for confusion, the proposed pay ratio disclosure requirements specify that the ratio must
be expressed as a ratio in which the median of the annual total compensation of all employees is
equal to one, or, alternatively, expressed narratively in terms of the multiple that the PEO total
compensation amount bears to the median of the annual total compensation amount. For
example, if the median of the annual total compensation of all employees of a registrant is
$45,790,
39
and the annual total compensation of a registrant’s PEO is $12,260,000,
40
then the pay
ratio disclosed would be “1 to 268” (which could also be expressed narratively as “the PEO’s
annual total compensation is 268 times that of the median of the annual total compensation of all
employees”).
We believe that the proposed requirements for the expression of the ratio would help to
address the concerns of commenters and are consistent with the statute. It does not appear that
the order of the ratio specified in Section 953(b) would impact investor understanding or the
usefulness, as expressed by some commenters,41 to investors of the proposed pay ratio disclosure.
39 Average salary for all occupations, U.S. Bureau of Labor Statistics, May 2012 National Occupational
Employment and Wage Estimates United States, available athttp://www.bls.gov/oes/current/oes_nat.htm#00-0000.
40 Derived from 2012 Average CEO at S&P 500 Index Companies, AFL-CIO, Trends in CEO Pay, available at
http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-the-99/Trends-in-CEO-Pay.
41 The commenters asserting that Section 953(b) disclosure would be useful to investors did not raise the order
of the ratio components as a factor that would diminish the meaningfulness of the information. Thesecommenters are listed at notes 155 through 165, infra.
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Request for Comment
6. Are there any other presentation issues that companies need guidance on or that should be
clarified in the pay ratio disclosure requirements? If so, please provide details about such
issues and any recommended guidance that should be provided.
2. Employees Included in the Identification of the Median
a. All Employees
Section 953(b) expressly requires disclosure of the median of the annual total
compensation of “all employees.” Consistent with that mandate, the proposed requirements state
that “employee” or “employee of the registrant” includes any full-time, part-time, seasonal or
temporary worker employed by the registrant or any of its subsidiaries42 (including officers other
than the PEO).43 Therefore, under the proposed requirements, “all employees” covers all such
individuals. In contrast, workers who are not employed by the registrant or its subsidiaries, such
as independent contractors or “leased” workers or other temporary workers who are employed by
a third party, would not be covered.44
42 By directing the Commission to amend Item 402, we believe that Section 953(b) is intended to cover
employees on an enterprise-wide basis, including both the registrant and its subsidiaries, which is the sameapproach as that taken for other Item 402 information. See Item 402(a)(2) and Instruction 2 to Item402(a)(3). Because this issue was not addressed by commenters, we specifically request comment below onthis approach.
In the context of Item 402 disclosure, a subsidiary of a registrant is an affiliate controlled by the registrantdirectly or indirectly through one or more intermediaries, as set forth in the definition of “subsidiary” under both Securities Act Rule 405 and Exchange Act Rule 12b-2. Therefore, for purposes of the proposed payratio disclosure, an employee would be covered by the disclosure requirements if he or she is employed bythe registrant or a subsidiary of the registrant as defined in Rule 405 and Rule 12b-2.
43 Rule 405 under the Securities Act states that the term “employee” does not include a director, trustee or
officer. The parenthetical “(including officers other than the PEO)” in Item 402(u)(3) of the proposed rulesis intended to clarify that officers, as that term is defined under Rule 405, are not excluded from thedefinition of employee for purposes of the proposed pay ratio disclosure requirements.
44 For example, if a registrant pays a fee to another company (such as a management company or an employee
leasing agency) that supplies workers to the registrant, and those workers receive compensation from thatother company, those workers would not be counted as employees of the registrant for purposes of the proposed rules.
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We note that commenters were split in their support for a rule that would include all
employees of the issuer,45 rather than only covering full-time U.S. workers.46 Many commenters
raised concerns that the inclusion of workers located outside the United States, as well as
employees that are not permanent, full-time employees, would render the comparison to the PEO
less meaningful, while at the same time imposing significant costs on registrants that have global
operations.47 According to these commenters, the international variation in compensation
arrangements and benefits, in addition to cost-of-living differences and currency fluctuations,
could distort the comparability of employee compensation to that of a PEO based in the United
States.
48
In addition, these commenters noted that the types of compensation that are recorded in
payroll and benefits systems outside the United States may vary from those recorded as
compensation in the United States due to local accounting standards and tax regulations. Because
of these variations, they further suggest that requiring registrants to recompute or adjust the output
of payroll systems to include non-payroll items that would be reportable as compensation under
Item 402 has the potential to impose significant compliance costs.49
In contrast, one commenter asserted that the provision was intended to cover all
employees of the issuer, including full-time, part-time, U.S. and non-U.S. employees.50 Some
45 See AFL-CIO I and letters from Americans for Financial Reform; CtW Investment Group; Group of
International Investors; Senator Menendez; Social Investment Forum; Trillium Asset Management; UAWMedical Benefits Trust; and Walden Asset Management.
46 See COEC I and letters from ABA; American Benefits Council; Brian Foley & Co.; Group of Exec. Comp.
Lawyers; NACD; Protective Life Corporation; RILA; SCSGP; and Towers Watson.
47 See COEC I and letters from ABA; American Benefits Council; Brian Foley & Co.; Group of Exec. Comp.
Lawyers; NACD; Protective Life Corporation; RILA; SCSGP; and Towers Watson.
48 See, e.g., letter from Group of Exec. Comp. Lawyers.
49 Id.
50 See letter from Senator Menendez, the sponsor of Section 953(b) (“Specifically, I want to clarify that when I
wrote ‘all’ employees of the issuer, I really did mean all employees of the issuer. I intended that to mean
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commenters asserted that the exclusion of non-U.S. and non-full-time employees would diminish
the meaningfulness of the pay ratio disclosure to investors.51 Some of these commenters
suggested allowing companies to present separate pay ratios covering U.S. and non-U.S.
employees, which they believed could mitigate concerns that the comparison of the PEO to
workers located outside of the United States could distort the disclosure.52
We acknowledge the concerns of commenters that the inclusion of non-U.S. employees
raises compliance costs for multinational companies, introduces cross-border compliance issues,
and could raise concerns about the impact of non-U.S. pay structures on the comparability of the
data to companies without off-shore operations. We also recognize that differences in relative
compliance costs may have an adverse impact on competition. We have weighed these
considerations and are proposing that the requirement cover all employees without carve-outs for
specific categories of employees. Although we believe that the inclusion of non-U.S. employees
in the calculation of the median is consistent with the statute, we have considered ways to address
the costs of compliance that commenters attribute to the provision’s coverage of a registrant’s
global workforce.
both full-time and part-time employees, not just full-time employees. I also intended that to mean all foreignemployees of the company, not just U.S. employees.”).
51 See AFL-CIO I and letters from Americans for Financial Reform; CtW Investment Group; Group of
International Investors; Institute for Policy Studies; and UAW Medical Benefits Trust. But see letter fromSocial Investment Forum (“[W]e acknowledge that a comparison of a U.S. CEO’s pay to the median forU.S. employees is the most useful comparison as a factor for the compensation committee in establishingexecutive pay packages.”) and letter from Walden Asset Management (“[F]or the purposes of analyzingtrends in executive pay for U.S. executives, statistics comparing compensation of NEOs to the median U.S.employee [are] most useful.”).
52 See AFL-CIO I and letters from Americans for Financial Reform; Walden Asset Management; and Social
Investment Forum (“We recommend that the SEC require two statistics, one on pay disparity with only U.S.workers and another for non-U.S. workers so that investors can better study pay disparity trends and inherentrisks.”).
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In particular, we are cognizant that data privacy laws in various jurisdictions could have
an impact on gathering and verifying the data needed to identify the median of the annual total
compensation of all employees. Commenters have asserted that, in some cases, data privacy laws
could prohibit a registrant’s collection and transfer of personally identifiable compensation data
that would be needed to identify the median.53 We also understand that in many cases, the
collection or transfer of the underlying data is made burdensome by local data privacy laws, but is
not prohibited.
For example, we acknowledge that multinational companies based in the United States
may need to ensure compliance with data privacy regulations in transmitting personally
identifiable human resources data (“personal data”) of European Union (“EU”) persons onto
global human resource information system networks in the United States, sending personal data in
hard copy from the European Union to the United States, as well as personal data “onward
transfers” to third-party payroll, pension and benefits processors outside of the European Union.54
In some EU Member States, employee consent is required, while in others, consent may not be
sufficient.55 Commenters also have asserted that other jurisdictions, such as Peru, Argentina,
Canada and Japan also have data privacy laws that could be implicated by the gathering of data
for purposes of the proposed pay ratio disclosure.56
53 See COEC II and letters from Davis Polk; Group of Exec. Comp. Lawyers; and SCSGP.
54 The EU Directive 95/46/EC, 1995 O.J. L 281 (European Union Directive on the Protection of Individuals
with Regard to the Processing of Personal Data and on the Free Movement of Such Data) sets forth theregulatory framework governing the transfer of personal data from an EU Member State to a non-EUcountry.
55 See letter from Group of Exec. Comp. Lawyers.
56 Id.
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Although we are not proposing any additional accommodation to address this concern, we
believe that the flexibility afforded to all registrants under the proposed rules could permit
registrants to manage any potential costs arising from applicable data privacy laws. For example,
consistent with the proposed requirements, registrants in this situation would be permitted to
estimate the compensation of affected employees. We request comment below on whether the
proposed flexibility afforded to registrants in selecting a method to identify the median, such as
the use of statistical sampling or other reasonable estimation techniques and the use of
consistently applied compensation measures to identify the median employee, could enable
registrants to better manage any potential costs and burdens arising from local data privacy
regulations or if there are other alternatives that would be consistent with Section 953(b).
Commenters did not provide us with information about applicable data privacy laws sufficient to
analyze how the flexibility allowed to all registrants under the proposed requirements could
impact the potential costs arising from such laws, and we request information about the specific
impact these matters would have on collecting or transferring data needed to comply with the
proposed requirements.
Request for Comment
7. Are there alternative ways to fulfill the statutory mandate of covering “all employees” that
could reduce the compliance costs and cross-border issues raised by commenters? For
example, would it be consistent with the statute to permit registrants to exclude non-U.S.
employees from the calculation of the median? Would it be consistent with the statute to
permit registrants to exclude non-full-time employees from the calculation of the median?
If not, could these alternatives be implemented in a way that would be consistent with the
statute?
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8. Should registrants be allowed to disclose two separate pay ratios covering U.S. employees
and non-U.S. employees in lieu of the pay ratio covering all U.S. and non-U.S.
employees? Why or why not? Should we require registrants to provide two separate pay
ratios, as requested by some commenters?57 What should the separate ratios cover (e.g.,
should there be one for U.S. employees and one for non-U.S. employees, or should there
be one for U.S. employees and one covering all employees)? If separate ratios are
required, should this be in addition to, or in lieu of, the pay ratio covering all U.S. and
non-U.S. employees? Would such a requirement increase costs for registrants? Would it
increase the usefulness to investors of the disclosure?
9. Please identify the applicable data privacy laws or regulations that could impact the
collection or transfer of the data needed to comply with the proposed pay ratio
requirement. Please also identify whether there are exclusions, exemptions or safe harbors
that could be used to collect or transfer such data. Please quantify, to the extent
practicable, the impact of such laws on registrants subject to Section 953(b), such as an
estimate of the number of registrants affected or the average percentage of employees
affected. How would the proposed flexibility afforded to all registrants (i.e., selecting a
method to identify the median, the use of statistical sampling or other reasonable
estimation techniques and the use of consistently applied compensation measures to
identify the median employee) impact any potential costs and burdens arising from local
data privacy laws? In particular, would a registrant be able to make a reasonable
estimation of the total compensation for affected employees? Would a registrant be able
57 See AFL-CIO I and letters from Americans for Financial Reform; Walden Asset Management; and Social
Investment Forum.
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to select a consistent compensation measure that is not subject to local data privacy laws?
If not, are there alternative ways to meet the statutory mandate of Section 953(b) that
would reduce the costs and burdens arising from local data privacy laws?
10. Are there applicable local data privacy laws that would prohibit the collection or transfer
of data necessary to calculate the annual total compensation of an employee or group of
employees or the identification of a median employee using a consistent compensation
measure? In that situation, would a registrant be able to reasonably estimate
compensation? If not, are there alternatives to the proposed rule that would address such a
situation while still being consistent with Section 953(b)? Should any such alternatives be
permitted? If an alternative should be permitted, what limitations or conditions should be
imposed on using the alternative? For example, should registrants be required to disclose
the approximate number of employees affected and identify the law that prohibits the
collection or transfer of data? Please discuss whether any such alternatives would
significantly impact the pay ratio disclosure.
11. Should the rule cover employees of a registrant’s subsidiaries as defined in Rule 405 and
Rule 12b-2, as proposed? Are there any situations where an entity meets the subsidiary
definition but its employees should not be included for purposes of the proposed
requirement? For example, should the rule be limited to subsidiaries that consolidate their
financial statements with those of the registrant? Should the rule not apply to subsidiaries
of certain types of registrants, such as the portfolio companies of business development
companies? Please provide details of any recommended limitations.
12. Alternatively, should the requirements be limited to employees that are employed directly
by the registrant (i.e., excluding employees of its subsidiaries)? Would such a limitation
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be consistent with Section 953(b)? How would such a limitation affect the potential
benefits of the disclosure? Would such a limitation have other impacts, such as
incentivizing registrants to alter their corporate structure, and, if so, are there alternative
ways that the rule could address those impacts?
13. Should Section 953(b) be read to apply to “leased” workers or other temporary workers
employed by a third party? Does the proposed approach to such workers raise costs or
other compliance issues for registrants, or impact potential benefits to investors, that we
have not identified? Do registrants need guidance or instructions for determining how to
treat employees of partially-owned subsidiaries or joint ventures? If so, what should such
guidance or instructions entail?
14. Is it likely that registrants would alter their corporate structure or employment
arrangements to reduce the number of employees covered by the proposed requirements?
How should we tailor the proposed requirements to address such an impact?
15. Does the proposed inclusion of all employees raise competition concerns? If so, are there
some industries or types of registrants that would be more affected than others? How
should we tailor the proposed requirements to address such concerns?
b. Calculation Date for Determining Who is An Employee
The proposed requirement defines “employee” as an individual employed as of the last
day of the registrant’s last completed fiscal year.58 This calculation date for determining who is
an employee would be consistent with the one used for the determination of the three most highly
58 Proposed Item 402(u)(3).
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compensated executive officers under Item 402(a)(3)(iii). Two commenters expressly supported
this approach.59
Additionally, two commenters suggested that only employees that have been employed for
the entire annual period (and as of the last day of the fiscal year) should be covered.60 The
composition of a company’s workforce typically changes throughout the fiscal year, and in some
industries and businesses, it can change constantly. Although Section 953(b) requires the median
calculation to cover all employees, it does not prescribe a particular calculation date for the
determination of who should be treated as an employee for that purpose. We believe that a bright
line calculation date for determining who is an employee would ease compliance for registrants
by eliminating the need to monitor changing workforce composition during the year, while still
providing a recent snapshot of the entire workforce.61 We agree with the commenters who
suggest that the most appropriate calculation date is one that is consistent with the calculation date
for determining the named executive officers under current Item 402 requirements.
In proposing this approach, we have assumed that the potential benefits of the disclosure
mandated by Section 953(b) would not be significantly diminished by covering only individuals
employed on a specific date at year-end, rather than covering every individual who was employed
at any time during the year. Although we believe that this approach could help contain
59 See letters from RILA (“For consistency with the requirements of Item 402, we believe the best option is to
determine the median total annual salary of the issuer’s employees as of the close of the most recentlycompleted fiscal year.”) and Towers Watson (“[I]t will be necessary to fix the employee group as of a
particular date…The last day of the prior year would seem an obvious choice.”).60
See letters from ABA and RILA. One of these commenters suggested that the use of the word “annual” in
Section 953(b) could be interpreted as limiting the scope of the provision to only those employees that have been employed for the full fiscal year. See letter from ABA.
61 We note that a requirement to track which employees have been continuously employed for the entire annual
period could increase costs for registrants, although, as discussed below, we are permitting registrants toannualize the compensation of certain employees.
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compliance costs for registrants, we acknowledge that it could have other costs. For example, this
approach would not capture seasonal or temporary employees that are not employed at year-end.
This would enable a registrant with a significant amount of such workers to calculate a median
that does not fully reflect the workforce that is required to run its business. It could also cause the
proposed requirements to be costlier for, and thereby have an anti-competitive impact on,
registrants whose temporary or seasonal workers are employed at year-end as opposed to other
times during the year. Finally, it is possible, although commenters have asserted that it is remote,
that registrants could try to structure their employment arrangements to reduce the number of
workers employed on the calculation date.
62
Request for Comment
16. Is the proposed calculation date workable for registrants? If not, what date should be used
(e.g., the last day of the registrant’s second (or third) fiscal quarter) and why?
17. In the alternative, should registrants be permitted the flexibility to choose a calculation
date for this purpose? Why or why not? If so, should we require the registrant to disclose
why a particular date was chosen? Should such flexibility be limited to certain
circumstances? If so, what principles should apply in identifying those circumstances?
18. Is it appropriate to limit the scope of covered employees to those who were employed on
the last day of the registrant’s fiscal year, as proposed? Why or why not? Is consistency
with other Item 402 disclosure important in this context? Would this approach ease
compliance costs for registrants? What impact would this calculation date have on
registrants that employ seasonal workers and would the exclusion of seasonal workers not
62 See AFL-CIO I (“The disclosure of compensation data under Section 953(b) will not have unintended
consequences on public company employment decisions.”).
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employed on the calculation date likely have an impact on the median or the ratio? Please
provide data, such as an estimate of the number of registrants that employ seasonal
workers and the average percentage of seasonal employees that would likely be excluded.
Is it likely that registrants might structure their employment arrangements to reduce the
number of workers employed on the calculation date? Are there other costs that would be
incurred using this approach that we should consider? Would the proposed calculation
date have a meaningful impact on the potential usefulness of the disclosure for investors?
Are there other ways to deal with defining the scope of covered employees that are more
effective at reducing costs and providing meaningful disclosure?
19. Should registrants be required to include any individual who was employed at any time
during the year, or for some minimum amount of time (and if so, what amount of time)
during the year?
20. Should the rule only apply to employees employed for the full fiscal year? Why or why
not?
c.
Adjustments for Certain Employees
Some commenters raised questions about how to treat employees who were not employed
during the entire fiscal year and recommended that companies be permitted to annualize the
compensation for these employees in order to more accurately reflect the employment
relationship.63 We agree that in instances where the employment relationship is permanent, and
not temporary or seasonal, registrants should be permitted to annualize the total compensation for
63 See, e.g., letters from Davis Polk; Frederick W. Cook & Co.; Social Investment Forum; RILA, Walden
Asset Management; and Trillium Asset Management.
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an employee who did not work for the entire year, such as a new hire or an employee who took an
unpaid leave of absence during the period.64
Accordingly, the proposed requirements include an instruction that states that total
compensation may be annualized for all permanent employees (other than those in temporary or
seasonal positions) who were employed for less than the full fiscal year.65 We are not proposing
to require registrants to perform this type of adjustment, however, because we do not believe that
the costs of requiring companies to make an extra calculation would be justified.
The proposed instruction is limited to permanent employees. In addition, as proposed, the
instruction would not permit a registrant to annualize some eligible employees and not others. As
discussed below, this instruction also would not permit adjustments that would cause the ratio to
not reflect the actual composition of the workforce, such as annualizing the compensation of
seasonal or temporary workers. Depending on the facts and circumstances, it could be
appropriate for a registrant to annualize the compensation for a permanent part-time worker who
has only worked a portion of the year (such as an employee who is permanently employed for
three days a week and who took an unpaid leave of absence under the Family and Medical Leave
Act). In such a case, the adjustment should reflect compensation for the employee’s part-time
schedule over the entire year, but should not adjust the part-time schedule to a full-time
equivalent schedule.
In proposing this approach, we have assumed that this annualizing adjustment would not
significantly diminish the potential usefulness of the disclosure mandated by Section 953(b). For
64 RILA noted employees on leave under the Family and Medical Leave Act of 1993 [29 U.S.C. 2601 et seq.]
and employees called for active military duty as common examples.
65 By use of the term “employee,” this proposed instruction would apply to individuals who were employed on
the last day of the fiscal year (the calculation date).
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example, we would not expect that annualizing the salary of a permanent new hire would impact
the potential ability of an investor to use the pay ratio disclosure as an indicator of employee
morale or to gain an understanding of a registrant’s investment in human capital, which some
commenters have identified as potential benefits of the disclosure under Section 953(b).66 We
also note that some of the commenters that support Section 953(b) disclosure were also
supportive of allowing annualizing adjustments for employees employed for less than the full
year.67
By permitting but not requiring registrants to annualize compensation for these
employees, the comparability of disclosure across companies could be reduced. As discussed
elsewhere in this release,68 we do not believe that precise comparability or conformity of
disclosure from registrant to registrant is necessarily achievable due to the variety of factors that
could cause the ratio to differ, and, accordingly, we do not believe that the costs associated with
attempting to promote precise comparability in this respect would be justified.
Although we are proposing to permit the annualizing adjustments described above, we
believe that some of the assumptions or adjustments suggested by commenters for calculating the
annual total compensation of employees might present a distorted picture of the actual
composition of a registrant’s workforce or compensation practices. We believe that certain
adjustments or assumptions, such as full-time equivalent adjustments for part-time workers,
annualizing adjustments for temporary or seasonal employees, and cost-of-living adjustments for
66 See AFL-CIO I and letters from; Calvert Investment Management; CtW Investment Group; Group of
International Investors; Americans for Financial Reform; Drucker Institute; Institute for Policy Studies;Social Investment Forum; Trillium Asset Management; and UAW Retiree Medical Benefits Trust.
67 See letters from Social Investment Forum and Trillium Asset Management.
68 See Section IV of this release.
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non-U.S. workers, would cause the median to not be reasonably representative of the registrant’s
actual employment and compensation arrangements for its workforce during the period and could,
therefore, diminish the potential usefulness of the disclosure. Therefore, the proposed disclosure
requirements would not permit such adjustments.
For example, under the proposed rules, a retailer that hires a seasonal worker at minimum
wage for three months during the holiday season would need to calculate annual total
compensation for that employee as three months at $7.25/hour ($3,480) and could not “annualize”
the wages as if the seasonal worker was paid for a full 12 months of work ($13,920). In this
example, if the seasonal worker was not still employed by the registrant on the last day of the
registrant’s fiscal year, the registrant would exclude that worker from the calculation of the
median.69
We understand that some commenters believe that these types of adjustments could allow
for a more meaningful comparison between the compensation of the PEO and that of the
registrant’s employees, especially where those employees are not full-time, U.S. employees.70
We are concerned, however, that adjusting for these variables could distort an understanding of
the registrant’s compensation practices. For example, if a registrant with a workforce primarily
located in jurisdictions with a lower cost of living than the United States adjusted the annual total
compensation of those employees using purchasing power parity statistics, the median of the
annual total compensation of all its employees would likely increase. Likewise, if a registrant
with a workforce that is primarily part-time or seasonal adjusted the annual total compensation of
69 See proposed Item 402(u)(3).
70 See letters from American Benefits Council; Americans for Financial Reform; Davis Polk; Frederick W.
Cook & Co., Inc.; RILA; Social Investment Forum; Trillium Asset Management; and Walden AssetManagement.
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those employees using full-time equivalent adjustments, the median of the annual total
compensation of all its employees would likely increase. In these scenarios, the registrant’s pay
ratio would show less of a disparity in compensation levels, while its labor costs would appear to
be higher than they actually were. We believe that, rather than making the disclosure more
meaningful, such a result could diminish the potential usefulness of the disclosure because the
ratio would show a less accurate reflection of actual workforce compensation and could permit a
registrant to alter the reported ratio to achieve a particular objective with the ratio disclosure.
Request for Comment
21. Is it appropriate to allow registrants to annualize the compensation for non-seasonal, non-
temporary employees that have only worked part of the year, as proposed? Why or why
not? Would allowing annualizing the compensation for these employees likely impact the
median or the pay ratio?
22. In the alternative, should registrants be required to annualize the compensation for these
employees? Why or why not?
23. Should we require all registrants that rely on the proposed instruction to annualize
compensation for these employees to disclose that they have done so (or only when the
adjustment is material, as would be required under the proposed instruction for disclosure
of material assumptions, adjustments and estimates)? Why or why not? If so, what
should the disclosure entail? For example, should the registrant only be required to state
that it has relied on the instruction, or should it also be required to discuss the number or
percentage of employees for which compensation was annualized?
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24. Should we allow full-time equivalent adjustments for part-time employees and temporary
or seasonal employees, as recommended by some commenters?71 Should we allow cost-
of-living adjustments for non-U.S. employees as recommended by some commenters?72 If
so in either case, please explain why. In particular, please address the potential concern
that these kinds of adjustments could cause the ratio to be a less accurate reflection of
actual workforce compensation. Is there an alternative way to mitigate this concern?
3. Identifying the Median
Commenters have suggested that a potential purpose of the pay ratio disclosure is to allow
investors to evaluate the annual total compensation of the PEO within the context of the
registrant’s internal compensation practices.73 We note that Congress specifically chose “median”
as the point of comparison for Section 953(b), rather than the average,74 and, therefore, the
proposed pay ratio requirements also require the median to be used.
Section 953(b) does not expressly set forth a methodology that must be used to identify
the median, nor does it mandate that the Commission must do so in its rules. In order to allow the
greatest degree of flexibility while remaining consistent with the statutory provision, the proposed
requirements do not specify any required calculation methodologies for identifying the median.
71 See letters from Americans for Financial Reform; Frederick W. Cook & Co., Inc.; and RILA.
72 See generally letter from CtW Investment Group.
73 See letter from Senator Menendez (“I wrote this provision so that investors and the general public know
whether public companies’ pay practices are fair to their average employees, especially compared to theirhighly compensated CEOs.
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